BUSINESS ORGANIZATIONS OUTLINE

IANNARONE – SPRING 2021

I. Agency: interactions among principals, agents, and 3ps with whom the agent deals
with on behalf of principal

A. Creation of Agency -Restatement (Third) of Agency §1.01

An agency relationship is created when one person or entity (a “principal”) manifests assent to
another person (an "agent") act on the principal's behalf and under the principal's control,
and the agent manifests assent or otherwise consents so to act.

Required Not Required

Mutual Consent (formal or informal) Consensual Relationship – looser than K law,
(express or implied): manifested by the does not need to be in writing
principal & the agent assenting

Benefit: when the agent acts on behalf of the Consideration

principal, the principal benefits
Control: Intent

B. Legal Consequences of Agencies

o Inward-looking consequences (principal
+ agent): duty of care & duty of loyalty
o Outward-looking consequences (agent +
principal + 3P): governed by principles
of attribution whatever that is

Yost v. Wabash College

F: P was 18 yr old frat member who suffered injuries in frat house. Filed lawsuit against college,
local frat, and national frat
I: Is there an agency relationship between the π and each of the entities so that the π can recover?
H: Maybe for local frat, not for college or national frat.
o College
 Mutual Consent: Agent must act on principal’s behalf. Consent to governance without
more is not sufficient to establish agency relationship (landlords are not principals). No
evidence college assented to have frat as agent
 Benefit: Π contends college benefits from the frats presence on campus, but benefit prong
is about mutual benefit?
 Control: Just no
o National Frat
 Mutual Assent: Strongly disapproves of hazing in bylaws and has risk guide
 Control: Lack of direct control over the everyday management of the frat. They allocated
control to the local frat. National frat structed the business the way they do to limit
liability
o Local Frat
 Ct held that the local frat could be subject to liability because the undisputed designated
evidence possibly showed that the local frat undertook to render supervisory services
intended to reduce the risk of harm to members, that upon which supervision Yost relied,
and that by failing to exercise reasonable care the local fraternity increased the risk of
harm to Yost. Aka pledge father worked on behalf of the local frat

C. Agents Fiduciary Duties to Principal

1. Duty of Loyalty
RS: Principals and agents owe duties to each other within an agency relationship. Principal’s
duties include performance of K obligations, good faith & fair dealing, and indemnification
under certain certs.
“An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected
with the agency relationship.”
Comment b: “The general fiduciary principle requires that the agent subordinate the agent's
interests to those of the principal and place the principal's interests first as to matters
connected with the agency relationship.”
Performance of contract obligations, care, competence, diligence, obedience, disclosure,

Three Ways to Breach Duty of Loyalty

 Competition (Rest. § 8.04) A duty not to compete with the principal in any matter within the
scope of the agency relationship
 Misappropriation of profits or opportunities (Rest. § 8.03) A duty not to act as an adverse
party to the principal in a transaction connected with the agency relationship
 Disclosure or use of confidential information (Rest. § 8.05(2)) A duty "not to use or
communicate confidential information of the principal for the agent's own purposes or those of a
third party"

o If agent breaches duty of loyalty, the principal’s primary remedies are damages and disgorgement of
profits, if any.

2. Duty of Care
“An agent has a duty to the P to act with the care, competence, and diligence normally
exercised by agents in similar circs”
 The duty of care is similar to a negligence standard. It is violated by being a slacker
or stupid. The agent is supposed to conduct the business with the level of competence
expected of someone in that position. To prove a violation, you must show something
beyond negligence (gross negligence, recklessness, etc.)
 The duty of care is designed to police the quality of work people do. 
 We look at the particular individual within the role in the partnership

When Agent has more than 1 Principal- The Restatement (Third) § 8.06(2)
An agent who acts for more than one principal in a transaction between or among them has a
duty
(a) to deal in good faith with each principal,
(b) to disclose to each principal
 (i) the fact that the agent acts for the other principal or principals, and
(ii) all other facts that the agent knows, has reason to know, or should know would
reasonably affect the principal’s judgment unless the principal has manifested that such
facts are already known by the principal or that the principal does not wish to know them,
and
(c) otherwise, to deal fairly with each principal.

RS For Duty of Loyalty with 1+ Principals

Having two jobs does not automatically result in a breach of loyalty, there needs to be a requisite
intent to act against the interest of the second employer. Employees are disloyal when their acts
are inconsistent with promoting the best interest of their employer at the time they were on
payroll AND/OR the employee deliberate acquires an interest adverse to his employer.

Food Lions Inc.

F: Two ABC reporters went undercover and got jobs (through fake resumes) at a Food Lion
supermarket. Footage obtained from secret cameras was aired in a Prime-Time Live program
exposing unsanitary and unsafe food handling practices.
I: Did Dale and Barnett breach the duty of loyalty as agents of Food Lion?
H: The reporters’ conduct was sufficient to breach the duty of loyalty and trigger tort liability.
R: In agency law, employees owe duty of loyalty to their employer. Disloyal when their acts are
inconsistent with promoting the best interests of their employers while on payroll
- The reporters were promoting the interests of one master (ABC) to the detriment of a
second (Food Lion) and committed the tort of disloyalty against Food Lion.
- The employees had the intent against the interests of their second employer for the
benefit of their main employer. The actions were adverse in a fundamental way.
Keys:
- ABC’s interests were adverse to Food Lion’s interests
- Because Dale and Barnett had the requisite intent to act against the interests of their
second employer, Food Lion, for the benefit of their main employer, ABC, they were
liable in tort for their disloyalty.”
o Intent is not a requirement but it good proof of breach

Best Approach to Answering Hypos

For the purposes of [scenario given], is X an agent of Y?
A. Mutual Consent: Look at their outwards manifestations to see if there is consent:
a. Has the principal done, said, or omitted to do or say something that the agent has
reasonably interpreted as indicating that the P requests and authorizes Agent to act
on behalf of P?
b. In response, has the Agent done, said, or omitted to do or say something that the
Principal has reasonably interpreted as indicating the Agent’s consent to act on
behalf of the Principal?
o This is an objective standard and even if there was no desire to create a
legal relationship, conduct & words can demonstrate there is
o Parties’ self-selected label is never dispositive when considering what
relationship, the parties have established, but can serve to show they did
not consent to act on the other’s behalf. However, if evidence shows that
 the elements necessary to establish an agency are there, then disclaimers
don’t matter.
B. Control: Need not be total or continuous and need not extend to the way the agent
physically performs, but there must be some sense that the principal is “in charge” –
a. At minimum, right to control the goal of the relationship

Problem 1-2 Non-Competes=Generally enforceable if reasonable to protect employer’s interest

 Limited in time
o Was three years excessive? What is customary in the industry? 3 years is
on the higher end, but it’s not excessively unreasonable
 Limited in Scope
o It’s not saying you can’t work for any other food company, just things that
compete with cloudberry. A global restriction would be too much. Have
strict identifiers to ensure the agent knows their outside responsibilities
 Not injurious to public
*duty of loyalty is limited to scope of relationship & time*

D. Principles of Attribution
Goals
1. Describe the outward-looking consequences of agency relationships, including by
identifying the elements of actual & implied authority & articulating the differences
between them
2. Actual Authority: identify whether an action undertaken with actual authority involves
express or implied
3. Apparent Authority: identify whether a situation by an agent can be attributed to the
principle under that doctrine

Agents can bind principals by acting with either (1) actual or (2) apparent authority). The agent’s
ability to bind the principal to 3ps is an essential aspect of the agent’s role because it is central to
an agent’s ability to accomplish tasks on behalf of the principal.

1. Actual Authority: When an agent's action is taken "in accordance with the principal's
manifestations to the agent that the principal wishes the agent so to act" (R3A)
 Created by a manifestation from the principal to the agent that the principal
consents to the agent taking actions on the principals’ behalf (look at
communications between them)
A. Express Actual Authority: conveyed orally/writing with specific language
a. Does the agent actually believe that that P wishes agent to take specific
action? – look at K & communications between P&A
B. Implied Actual Authority: (1) to do what is necessary, usual, and proper to
accomplish or perform an agent’s express responsibilities; or (2) to act in a
manner in which an agent believes that the principal wishes the agent to act based
on the agent’s reasonable interpretation of the principal’s manifestation in
light of the principal’s objectives and other facts known to the agent.”

a. Does agent actually believe (1) OR (2)? Can arise from:

 i. Incidentally from express authority
ii. From principal’s manifestations (words or conduct)
iii. From custom or usage, past relationship (subjective)
iv. From an emergency situation

b. Is this belief reasonable? - is it in the scope of their authority?

i. Would a person in the agent’s position with the information
available at the time done the same thing? Can’t be in furtherance
of self interest
c. Is it based on P’s manifestations? (need to say 3 to all of them for the P to
be liable for the agent’s actions)
i. Manifestation can consist of inaction when silence, reasonably
interpreted, indicates consent. If agent takes action, the action
comes to the attn of the principal, and principal makes no object,
agent may have actual authority
1. i.e. being aware agent is doing X for years and never
objected
ii. Express manifestation of the principal can always negate implied
authority

Castillo v. Case Farms

F: πs allege misrep & mistreatment due to terrible working conditions, transportation, and
housing conditions. Πs were recruited by ATC, who was hired by Case Farms to recruit
employees for chicken farms.
I: Was ATC an agent of Case Farms and if they are, is Case Farms liable?
H: ATC was an agent, they had actual express & implied authority = Case Farms liable
Case Farms argues that the scope of the agency relationship was limited solely to
informing recruits about availability of work @ Ohio
 ATC had an explicit agreement with CF that gave it express authority to recruit
and hire people to work at CF and had the implied authority to do all things
proper, usual, and necessary to exercise that authority. This includes the housing
and transportation issues, since the plant was in Ohio and they were recruiting in
FL & TX. It was essential to hiring to provide housing and transportation, and CF
meant for ATC to perform these duties.

Problem 1-3 “Clean, orderly, lawful, and respectable place of business in accordance with the
standards established in the Franchise Agreement & Operation Manual”
 Purchasing cleaning supplies? Express authority to clean the bathrooms, therefore
in order to do what’s necessary & proper its implied that he has to purchase
cleaning supplies (its in scope of authority as employee)
 Purchasing cash register? Express bc the agreement says exactly which cash
register to purchase
 Hiring an interior designer? It depends, we don’t know how the approval process
works.
 Closing shop on Sunday? No actual authority bc operating manual says has to be
open for 7 days
 Firing unshaven male employee? Implied authority to do what is necessary to
maintain a clean orderly respectable place of business & the appearance of the
employee could fall under any of these three things
2. Apparent Authority
 One person may bind another in a transaction with a third person, even in the absence of
actual authority, when the third person reasonably believes – based on "manifestation" by
the purported principal – that the actor is authorized to act on behalf of the purported
principal
 Apparent authority may be the basis for liability in two situations
i. (1) where persons appear to be agents, even though they do not qualify under the
definition discussed above (so no agency)
ii. (2) where agents act beyond the scope of their actual authority

A. Creation of Apparent Authority: Apparent authority is created by a person’s manifestation

that another has authority to act with legal consequences for the person who makes the
manifestation, when a third party reasonably believes the actor to be authorized and the belief
is traceable to the manifestation.
- How do you manifest consent or intentions? Through written or spoken words or conduct

Step 1: Does the 3p actually believe the actor has authority to act on behalf of P?
Step 2: Evaluate the manifestations from the P to the 3P
o Ex: giving the agent a business card, giving them letterhead to send out
communications with, giving them a manager name tag.
Step 3: Evaluate manifestations that were not even directly made from P to 3P
o R3 expanded the definition of manifestations to include those reached through an
intermediary (as long as traceable to P) or simply placing a person in a certain
position (a manifestation to the market)
Step 4: Evaluate the reasonableness of 3P’s belief
o What is the past history between P and Third Party?
o What is the industry custom?
o What is the nature of the transaction? Is it for the P’s benefit?

Two key points to finding apparent authority

(1) the manifestation (however defined) must emanate from the principal (or purported
principal) and must be received (either directly or indirectly) by the third person
(2) the scope of the agent's apparent authority depends on the third person's reasonable
interpretation of that manifestation

Cefaratti v. Aranow
F: Doctor left sponge in abdomen & π sued surgeon & hospital. Π alleges hospital is liable for
own negligence & vicariously liable for Doctor because they held out Doc. To be their
agent/employee. She attended seminars at the hospital conducted by the doctor & his staff and
she got pamphlets. She assumed Doc was employee bc of his privileges & she relied on this
when she chose to get her surgery there
H: Both doctrine of apparent authority & apparent agency may be applied in tort actions, so
hospital can be vicariously liable - is this something diff?
Reasoning: Following alternative standards for establishing apparent agency in tort cases
  First, P may establish apparent agency by proving that:
o (1) the principal held itself out as providing certain services
o (2) the plaintiff selected the principal on the basis of its representations; and
o (3) the plaintiff relied on the principal to select the specific person who performed the
services that resulting in the harm complained of by the plaintiff
 Second, P may establish apparent agency in a tort action by proving the traditional elements of
the doctrine of apparent agency, as set forth in our cases involving contract claims, plus
detrimental reliance
o (1) the principal held the apparent agent or employee out to the public as possessing the
authority to engage in the conduct at issue, or knowingly permitted the apparent agent or
employee to act as having such authority
o (2) the plaintiff knew of these acts by the principal, and actually and reasonably believed
that the agent or employee or apparent agent or employee possessed the necessary
authority; and
o (3) the plaintiff detrimentally relied on the principal's acts; i.e. the plaintiff would not
have dealt with the tortfeasor if the plaintiff had known that the tortfeasor was not the
principal's agent or employee

3. Estoppel
Differences from apparent authority:
o Estoppel requires detrimental reliance
 Estoppel allows the third party to hold the principal liable but does not give the
principal any rights against the third party (although the principal can often cure
that deficiency by ratifying the transaction)

Case Study Philly Dry Bar: Can Philly Dry Bar sue Alan for breach of fiduciary duty?
* Duty of Loyalty: he might be stealing customer base or proprietary info. By doing this, he is
acting in a manner that is averse to his boss -food lion case in exam

II. Partnerships
Two general principles: (RUPA are default rules for inner workings unless partners have agreed
otherwise except eliminate loyalty or good faith, but 3p rules are mandatory)
(1) one partner may be bound to third parties by the act of another partner
(2) partners are personally liable for obligations of the partnership
(3) a partnership is an entity distinct from its partners RUPA §201

A. Formation: RUPA § 202(a): A partnership is an association of 2 or more persons to

carry on as co-owners of a business for profit
o Needs to be more than a single transaction
o Co-owners  equally responsible for decisions/management/control
o Profit  non-profits can still be partnerships; question of where the money goes, not
whether money is made
Intent: RUPA §202(a) Partnership may be formed “whether or not the persons intend to
form a partnership”
o Not dispositive, but highly persuasive. Partners must intend only to do “things
which constitute a partnership”
o Courts are not bound by statements of parties disavowing an intention to enter
into a partnership if the evidence establishes elements of a partnership
Profit Sharing: RUPA§202(c) prima facie evidence of a partnership, but not required.
o Right to share in the profits is necessary doe
o Person who receives profit is presumed to be partner, unless they got it as
wages or compensation as an employee

Holmes v. Lerner
F: H&L agree to start Urban Decay orally. L handled most of the biz, but H attended board
meetings & worked at the warehouse for a year with no pay & did research on colors and stuff
H asked for allocation of shares & never got it. They offered her 1% she said no so they banned
her
I: Is there a partnership between H&L even though profit share was never discussed?
R: An express agreement to divides profit is not required to prove the existence of a partnership,
a lot of evidence of intent – doesn’t need to be formalized

Problem 2-1: No partnership bc Park maintains full control of the company, and therefore has
some control over Laylock. and equal control is essential for co-ownership. The fact that they
share income isn’t essential to determine that there is a partnership. Moreover, he only gets 25%
and absent an agreement otherwise, the default is for equal shares & no filing of partnership tax
return.

B. Management/Separation of Ownership & Control

1. Voting Rights/Control
Absent of an agreement to the contrary, all partners have equal rights in management of the
partnership under RUPA & UPA.
 RUPA 401(j) A difference arising as to a matter in the ordinary course of business of
a partnership may be decided by a majority of the partners.
 An act outside the ordinary course of business of a partnership, adding a partner, and
an amendment to the partnership agreement may be undertaken only with the consent
of all of the partners.
 2. Transferability/Becoming a Partner
RUPA §503 Absent a contrary provision in the OA or the consent of the partners, a transferable
interest is the only interest in a PS that can be transferred to a person who is not already a
partner.
 A transfer does not by itself cause a dissociation as a partner or dissolution
 Transferee has the right to receive the distribution
 A partner can sell their right to receive financial distribution, but that person will not
be a partner unless all of the partners consent (or there is something else in the OA for
this).
 Transferee has the right to seek judicial determination that it is equitable to wind up
the partnership bizz

RUPA §402(c) A person may become a partner without acquiring a transferable interest or
making or being obligated to make a contribution to the partnership – then how lol

Can partnership sue partner? Yes RUPA §405(A): A partnership may maintain an action against
a partner for a breach of the partnership agreement, or for the violation of a duty to the
partnership, causing harm to the partnership

Agency & Partnerships RUPA 301(1)

Partners are agents of the partnership, so they have actual authority and apparent authority
- Actual authority: Does not mean that every agent is a partner of the other partner
However, partnership can be liable to a 3p for a partner’s apparent authority
- When “apparently carrying on in the ordinary course . . . business of the kind carried on
by the partnership”
- Third parties may rely on a partner in the business of the kind carried on by the
partnership
o No apparent authority when (1) 3rd party knows person doesn’t have actual
authority or (2) not within the ordinary scope of business

Ex: If a 3p sues partnership, under default rules 2 partners are 50/50 liable to the 3p, but the
actual partner who fucked up might be able to be sued to recover that 50%

Vecchitto v. Vecchitto
F: Christopher sues brothers on behalf of the Partnership; Brothers argue that Christopher is not
authorized to sue; Partnership Agreement is silent on filing of lawsuits; CT partnership law must decide
I: Even if they can sue; must figure out if the lawsuit is within the ordinary course of business
H: No, lawsuit is not in the ordinary course of business because primary purpose for partnership: selling
ice cream and frozen ice as per PA
o Clear that filing a lawsuit is not within the ordinary course of the partnership's business
 As such, it must be consented to by all partners
 Not all partners consented to the lawsuit
o Partnership lacks standing

Problem 2-2 pg 47: Wheeler joins partnership w/o being authorized to practice law and
misappropriates client funds. Under what circs would the law firm or its partners incur liability
for Wheeler’s actions?
 * did he have actual or apparent authority to do these things?
- Under Actual Authority, a partner is an agent of the partnership. When we are looking at
what partners do in partnerships, we need to see if it was ordinary or outside the scope of
business first of all to see if they had any authority express or implied
o There was no express authority bc there is a part of the partnership agreement
that says that he can’t practice law, therefore there is also no implied authority bc
it follows from the express statement
- Under Apparent Authority, we would need to show there was a manifestation made my
wheeler & that 3p reasonably believed this guy was acting with authority. There seems to
be apparent authority here.
o Manifestation: law firm’s hiring of that person is a manifestation of that person’s
ability to act on behalf of them in the practice of law, which is in the ordinary
course of business
- Maybe partners were grossly negligent in allowing Wheeler to have signatory access to
the funds, so it violates the duty of care under RUPA so maybe we can also hold them
liable under here

C. Fiduciary Duties: can’t totally eliminate both of them, but can K around and specific what are
violations
RUPA § 409
(a) Partner owes to the partnership and the other partners the duties of loyalty
and care.
(b) The fiduciary duty of loyalty of a partner includes the duties:
(1) Anti-theft: to account to the partnership and hold as trustee for it any
property, profit, or benefit derived by the partner;
(2) No self-dealing: to refrain from dealing with the partnership in the
conduct or winding up of the partnership business as or on behalf of a
person having an interest adverse to the partnership (like being on both
sides of a transaction); and
(3) Anti-Competition: to refrain from competing with the partnership in
the conduct of the partnership’s business before the dissolution of the
partnership.
* acceptable limitation on duty of loyalty: limit duty to self-dealing
if partner is involved in other similar businesses.

(c) The duty of care of a partner in the conduct or winding up of the partnership
business is to refrain from engaging in grossly negligent or reckless conduct,
willful or intentional misconduct, or a knowing violation of law.
* a negligent act does not violate duty of care, does not include ord. neg.
(d) Adds obligation of good faith & fair dealing, non-waivable

RUPA § 105(c)(5) A partnership agreement may not alter or eliminate the duty of care BUT
 Can alter duty of care, but may not authorize conduct involving bad faith, willful
or intentional misconduct, or knowing violation of law
RUPA §105(d) For loyalty:
  PS can specify the method by which a specific act or transaction that would
otherwise violate the duty of loyalty may be authorized or ratified
 Can also alter or eliminate duty of loyalty if not manifestly unreasonable
 Identify categories of activities that do not violate the duty of loyalty

RUPA § 105(c) Can’t eliminate contractual obligations of good faith & fair dealing, but the
partnership agreement may prescribe the standards, if not manifestly unreasonable, by which the
performance of the obligation is to be measured

Meinhard v. Salmon
- Facts: Gerry leased Salmon (D) Hotel Bristol for 20 yrs. D and Meinhard (P) formed joint
venture. Lease was up and Salmon executed new lease and didn’t tell Meinhard.
- Issue: Is a co-adventurer (D) required to inform another co-adventurer (P) of a business
opportunity that occurs as a result of participation in a joint venture?
- Holding: Yes. Co-adventurers, like partners, have a fiduciary duty to each other,
including sharing in any benefits that result from the parties’ joint venture.
- R: Loyalty is not just about honesty, “we are looking at application of the default rule. So
if an opportunity comes up related to the JV, he should’ve disclosed it”
- Reasoning
o New lease was extension of an earlier lease
o Salmon opportunity arose out of status as co-adventurer so he had a duty to tell
Meinhard
o Salmon breached fiduciary duty by keeping transaction from Meinhard and
didn’t not allow him to compete. He should’ve disclosed the opportunity & theft
of opportunity is a breach
 But actually, they should’ve negotiated a clause that limits the duty of
loyalty to specific dealings about the 1 thing. – good to keep in mind for
test
- Dissent
o Salmon didn’t breach bc the existing lease expired
o Fiduciary duties restricted to matters pertaining to first lease and ended when that
expired

2-3: Did Baylock violate his duty of loyalty under RUPA?

Self-dealing: selling his software to his law firm, but is it an argument that he sold it for a lesser
price, so he isn’t getting a profit on the software.
Theft: using billable hours to work on this
First, we need to determine the scope of the partnership to determine if there was any
misappropriation
1. Line of Business Test: Is this what the partnership has experience and ability to
exploit? No because the partnership is a law firm, they are not a technology company
2. Expectancy Test: Does the partnership have an interest in this opportunity? Would it
help them further the business? Yes (use the time he worked at firm to develop the
software)
D. Partnership Financials/
Issues relating to the financial attributes of the partnership can be broken down into 2 major parts
o (1) How are the profits and losses ultimately allocated among the partners?
o (2) Who is responsible to pay third parties for partnership liabilities?
1. Partnership Accounting
a. Capital account: tracks each partner's ownership claim
b. Determined by
i. (1) contributions made by each partner to the partnership;
1. Result in a credit to each partner's capital account
ii. (2) each partner's share of profits or losses from partnership operations
1. Partners often change the usual practice of equal sharing by contract
2. Usually losses are attributed to each partner in the same way
iii. (3) any withdrawals of funds from the partnership; and
1. Partners take periodic distributions from the partnership in the form of draws
2. When made in regular installments, a draw is akin to a salary or wages
3. Charged to capital account
4. Profits: earnings reinvested; draws earnings removed
5. Usually a draw at the beginning then at the end (depending on profitability)
iv. (4) each partner's gains or losses upon sale of the partnership or its assets
1. Amounts do not necessarily correspond to the value of the partnership
2. Each partner would receive the amount in his or her capital account prior to
the sale of the partnership plus an additional amount equal to his or her share
of the gain
3. If the surplus is less than the total capital accounts, the partnership is said to
have a loss on the sale
v. Does not reflect loans by partners to the partnership

2. Sharing of Profits & Losses: The allocation of profits and losses is usually determined by each
partner's interest in the partnership
* RUPA §401(b) Equal sharing of profits and losses is the default rule
- Losses are usually allocated in the same proportion as profits & partners do not get a salary
* RUPA 401 (c) the partnership must reimburse a partner for payments made & indemnify a
partner for liabilities incurred in the ordinary course of partnership bizz
*RUPA §401(f) partners are entitled to a repayment of any capital contributions or advances
made to the partnership

In what order are partnership assets paid out?

 Assets of the partnership are used to pay liabilities of the partnership in the following order
(1) amounts owed to creditors of the partnership who are not partners
(2) Any loan the partner has made to the partnership, outside of their Profits;
(3) Partner capital accounts; and
(4) Partnership Profits split up according to ownership interest

Kovacik v. Reed
F: Kovacik told Reed he’d invest all the money if Reed did all the labor & that the profits would be
shared 50/50, but nothing was said about losses being split 50/50
- Partnership lost money & Kovacik demanded 50% $ back
I: If losses were never discussed, is the partner who only contributed labor liable? NO
 R: When there is no agreement for allocation of losses, it is only divided equally if both parties
contributed capital. If one contributed capital & the other labor, neither is liable to the other for
contribution of the loss sustained

E. Personal Liability of Partners

All partners are jointly and severally
liable for all obligations of the
partnership unless otherwise agreed
by the 3p or law RUPA §306(a)
 Principle of Exhaustion: Creditor
first tries to exhaust the
partnership assets RUPA 307(c)
 The creditor of a partnership
judgement may not satisfy the
judgement from a partner’s assets
unless there is also a judgement
against the partner
 A person admitted as a partner into an existing PS is not personally liable for any PS
obligations incurred before the person’s admission as a partner

Gimlet Hypo: Alex is speeding and hits a pedestrian while driving to meet a potential new -a&d
advertiser who wants to sponsor Gimlet’s programming.
1. Is Gimlet responsible for the pedestrian’s losses?
2. Is Matt responsible for the pedestrian’s losses?

If You Are Trying to Hold a Good Partner Liable for a Bad Partner’s Acts

Step 1: Step 2: Partnership’s Step 3:

Bad Partner’s Conduct Liability Good Partner’s Liability
Section 305:
Section 305:
Did a bad
Does the bad
partner Section 306:
partner’s act If yes to all steps,
commit a Is the good
create a debt partnership & partners
wrongful act partner liable
for the will be liable. But PS &
or omission or for this debt
partnership? prts. Might be able to
other of the
(must say yes sue for breach of
actionable partnership?
to a or b) fiduciary duty?
conduct?

Liability under §305(a) – Must say yes to three questions.

1. Did the partner commit a wrongful act or omission or other actionable conduct?
2. If so, did the partner do so while acting in the ordinary course of business or with
actual or apparent authority of the partnership?
 1. Driving: Alex had actual authority implied of signing up people to help
make money (necessary and proper to get shit done for the PS)
2. Speeding: No actual authority to speed – so we look at apparent (whether
a 3p that looks at Alex speeding on the way to an apt) This can be
reasonable belief that Gimlet made a manifestation to Alex to go get
advertising money & this is in the ordinary course of bizz
3. If so, did the wrongful act or omission or other actionable conduct cause a third-
party to suffer loss or injury or cause the partnership to incur a penalty?
1. Yes some lady got injured
Liability under §305(b) – Must say yes to three questions.
1. Did the partner receive or cause the partnership to receive money or property of a
person who is not a partner?
2. If so, was the money or property misapplied by the partner?
3. If so, was the money or property received in the course of the partnership’s
business or while acting with the authority of the partnership?

§306: Partner’s Liability for a Partnership Debt

A partner is jointly and severally liable for a debt of the partnership unless one or more of the
following is true:
1. The claimant agrees that the partner is not liable;
2. Another law provides that the partner is not liable;
3. The debt was incurred prior to the partner’s admission to the partnership – unless
the partner agrees to be responsible for these prior debts;
4. The partnership is a limited liability partnership

In re Keck, Mahin & Gate

F: Two former partners, Billauer and Ho’okano, are being held liable for several malpractice
claims against Keck arising after they left the partnership.
I: Can a partner be liable for wrongful acts/omissions of other partners that were committed
before or during the time that they were a partner? YES.
Reasoning
- A partner doesn’t escape liability after leaving when the claim arises from conduct at the
time they were in the partnership bc this isn’t fair to 3P
- Partnership dissolution doesn’t release the former partners from liability to 3P. Attempts
to limit liability in an agreement do not always control.
o Only the claimant or a 3rd party can release a partner from liability

F. Dissolution: Refers to the process of a partner leaving the partnership, liquidating & winding up
a partnership
 Dissociation: refers to when a partner wants to terminate their right to be in the
partnership RUPA 603 but it does not necessarily terminate the partnership/start the
wind-up. RUPA §602(a): a partner may dissociate at any time
 Under UPA, when P leaves PS, it is dissolved, even if the remaining partners continue the
bizz (in which case the new PS is formed among the remaining partners)
  In analyzing the effect of dissociation on the rights of the partners, a key issue is whether
the dissociation was "rightful" or "wrongful", and resolution of that issue often depends
on the nature of the partnership
o Generally, "rightful" when it is accomplished without violating the agreement
between the partners

What events trigger a dissociation? RUPA §601

(1) Express notice in partnership at will (2) event stated in the OA
(3) expelled according to OA or (4) unanimous vote of all partners
(5) expelled through judicial order (6) bankruptcy (7) DEATH

When does a wrongful dissociation happen? RUPA §602

A partner who wrongfully dissociates is liable for any damages caused by the wrongful
dissociation.
o If the partner breaches an express provision of the partnership agreement
o In a partnership for a definite term or for a particular undertaking, before the expiration of
the term or completion of the undertaking 602(b)

What are the effects of a dissociation? RUPA §603

(a) If a person’s dissociation results in a dissolution and winding up of the partnership
business, [Article] 8 applies; otherwise, [Article] 7 applies.
(b) If a person is dissociated as a partner:
(1) the person’s right to participate in the management and conduct of the partnership’s
business terminates, except as otherwise provided in Section 802(c); and
(2) the person’s duties and obligations under Section 409 end with regard to matters
arising and events occurring after the person’s dissociation, except to the extent the partner
participates in winding up the partnership’s business pursuant to Section 802.
(c) A person’s dissociation does not of itself discharge the person from any debt, obligation, or
other liability to the partnership or the other partners which the person incurred while a partner

What if the partners want to continue the partnership after dissociation?

RUPA§701: Dissociation as a Partner when Bizz Not Wound Up
(a) If a dissociation does not cause the dissolution and winding up of the partnership
business, the dissociating partner must be bought out pursuant to this article
(b) The dissociated partner's interest must be purchased for the greater of the liquidation
value or "the value based on a sale of the entire business as a going concern without the
dissociated partner”
(h) Partner who wrongfully dissociates is not entitled to buyout until expiration of term or
undertaking’s completion unless court says payment will not hurt partnership
 the dissociated partner's liability and ability to bind the partnership are terminated
(§702)

When the dissociation results in dissolution & winding up of the partnership RUPA §801
 (1) At will PS: If the partner disassociates through notice, besides for a RUPA 601(2)-(10)
reason, such as death, bankruptcy, or mental incapacitation, the partnership must buy out
that partner’s interest and it goes to windup/dissolution.
(2)(A) Particular Undertaking: A person’s dissociation as a partner by death or otherwise
under Section 601(6) to (10) or wrongful dissociation under Section 602(b), makes a term
partnership susceptible to dissolution. If within ninety days after the dissociation at least half
of the remaining partners express their will to dissolve the partnership, the partnership
dissolves. Section 601(6) to (10) pertain, respectively, to a partner’s bankruptcy or similar
financial impairment (6); a partner’s death or incapacity (7); the distribution by a trust-
partner of its entire transferable interest (8); the distribution by an estate-partner of its entire
transferable interest; and the termination of an entity-partner (10).
a. In a 7 partner PS, 1 partner dissociates by dying before the end of the term. The
PS will dissolve within 90 days if at least 3/6 vote for dissolution. This scenario
same if its wrongful
(2)(B) —This provision states that a term partnership may be dissolved and wound up at any
time by the express will of all the partners. The provision merely reflects the general rule that the
partnership agreement may override the statutory default rules and that the partnership
agreement, like any contract, can be amended at any time by unanimous consent.

§802: person whose dissociation resulted in dissolution my participate in winding up unless it

was a wrongful dissolution

Fischer v. Fischer

Winding Up

Limited Partnerships (LPs)

 - Definition: general partnerships that have registered with the secretary of the state to get a
level of limited liability protection for the limited partners (RUPA §901)
- A limited partnership is a hybrid business organization that offers a management and tax
structure similar to that of a partnership, but allows some investors (i.e., the limited
partners) to have limited liability like shareholders of a corporation.
o Developed to facilitate commercial investments by those who wanted a financial
interest in a business but did not want all of the responsibilities and liabilities of
partners.
o This protects the personal assets of partners from the risk of negligence or
malpractice by another partner.
- Structure
o A limited partnership is a partnership formed by two or more persons, and under
ULPA § 102(11), must have at least one general and at least one limited partner.
o General partner
 The general partner assumes the management responsibilities of the
partnership and full personal liability for the debts of the partnership.
o Limited partner
 A limited partner is a partner who makes a contribution to the partnership
and obtains an interest in the partnership’s returns, but who is not active in
the partnership’s management and is not liable for partnership debts
beyond her contributions.
- Formation
o Certificate of Limited Partnership
 A certificate of limited partnership must be signed by all of the general
partners and filed with the secretary of state.
o Fiduciary Duties
 General partners owe fiduciary duties to the limited partners.
- Benefits
o Taxation
 LPs have flow through taxation, like a general partnership.
o Limited Liability
 General Partners
 General partners are personally liable for the limited partnership’s
debts.
 Limited Partners
 Generally, a limited partner is not liable for the debts of the
partnership beyond her contribution.
 Exceptions:
o A limited partner who participates in the control of the
business is liable to persons who transact business with the
LP reasonably believing, based on the limited partner’s
conduct, that the limited partner is a general partner.

Limited Liability Partnerships (LLPS)

 o In a LLP, the general partners typically are not personally liable for the
partnership’s obligations, like the limited partners, but rather only liable for
obligations arising from own activities
o A statement in the LP certificate must be included to that effect.
o Frode Jensen Case Study (LLP)
 Partners were working while they committed the acts
 Apparent authority: they all had management positions, out of 700
Pillsbury employees, they had specific titles
 Within ordinary scope of business?
 Press release: maybe
 Hiring: maybe
 Firing: yes bc me too movement
 What does business do regularly?
o Do other firms do this when people leave? Do other law
firms breach NDA agreements?
 LLP partners are still liable for their own bad actions or if they had the
power to control (i.e. if they were directing supervising other humans)
 Pillsbury is liable to the 3rd party (Frode)

III. Limited Liability Companies

A. Formation: LLCs are formed through a formal filing of a certification of formation with
the state
* most contain minimal information (address and name of company
* RULCA § 107(d) If certificate of incorporation & operating agreement conflict,
the operating agreement control for internal things in relations to members except
“3Ps & those who reasonably rely on it”
* Operating agreements contain operational details: member control,
dissociations, transfers & mergers
* RULCA § 105: conflict between OA & statute, statute wins for mandatory &
OA for non-mandatory

Stone v. Jetman Properties LLC

F: Hammond ∆ drafted artices of org for LLC but failed to file with the state. Stone quitclaims a
duplex to Jetmar, then∆ mortgaged it to Ortega. Then after Jetmar failed to pay, Ortega
foreclosed the duplex. Stone was like ur not even a real LLC I own this duplex Ortega can’t take
it
I: Is deed to Jetmar from Stone void beause Jetmar did not exist? If so, is Stone barred by the
corporation-by-estoppel doctrine from challenging Ortega’s title to the property?
H: Yes. Stone owns the duplex. A court may refuse to apply the doctrine of corporation-by-
estoppel when the corporation is used to accomplish fraud.
 Even though Stone treated Jetmar as a corp, we are abandoning this de-facto thing
because the process to incorporate an LLC is so simple no one could ever actually
attempt it and fail
B. Management
An LLC can be managed by members or management may be centralized in one or more
managers, as in a corporation. Member managed in the default rule if not specified in OA
DLLCA §402 Binding Authority: Unless otherwise provided in an LLC agreement, each
member and manger has the authority to bind the LLC
Member-Managed
 If members are managing, each member is an agent of the LLC and has the
power to bind the LLC.
 RULLCA § 407(b): members in a member managed LLC have equal management
rights and decide all ordinary business matters by a majority of the members
o Extraordinary matters and amendments to operating agreement require consent
of all the members
 DLLCA § 18-402: DLLCA allocates management rights in a member-managed LLC
"in proportion to the then current percentage or other interest of members in the
profits of the limited liability company owned by all of the members"
o Decision of members are made by majority vote & each can bind unless
otherwise provided in the agreement

Therefore, if profits & losses are shared according to contributions, a member’s
voting strength is based on his percentage of ownership interest in the LLC- not
one member one vote.
Manager-Managed
 If management is by managers, only the managers are agents of the LLC and
have the power to bind the LLC by acts apparently carrying on the business of
the LLC
 RULLCA § 407(c): managers have exclusive management rights and decide all ordinary
business matters by a majority of the managers
 RULLCA § 407(c)(4): all members must consent to undertake any act outside the
ordinary course of the company's activities or amend the operating agreement
 DLLCA § 18-402: managers have whatever rights are provided in the limited liability
company agreement
LLC Mgmt DLLCA

Default Member Mgmt; Op Agmt must specify if Mgr Mgmt. DLLCA 18-402; Stat mgmt
rules can be changed by agmt. DLCCA 18-1101(b)
Rights in Member-Mgd Rts allocated in proportion of % of interest in profits; Decisions by majority vote.
LLC DLLCA 18-402
Rightsts in Manager- Whatever the op agmt says. DLLCA 18-402
Mgd LLC
Authority Unless otherwise provided in LLC Agmt, each member/mgr has auth to bind LLC.
DLLCA 18-402

Gottsacker v. Monnier (106)

F: Monnier, Paul Gottsacker, and Gregory Gottsacker, were members of NJ LLC, a real estate
investment vehicle. Julie owned 50%, and the two brothers 25% each. After a falling out, Julie
and Paul transferred the only remaining asset of the LLC, a warehouse property, to a new LLC.
They sent Gregory a check for $22k, representing his 25% in the property. Gregory sued,
alleging an illegal transaction, because the sole purpose of the transfer was to eliminate his
ownership interest in the asset.
I: (1) Whether the petitioners possessed the majority necessary to authorize transfer in question?
o Issue one & voting: agreement didn’t define collective so go the dictionary,
nothing in agreement said they couldn’t vote collectively  collective means
25% each.
(2) Does a member of an LLC w a material conflict of interest have to fairly deal with the
company and its members?
o Issue two: Monnier and Paul had conflict of interest in approving the
transaction bc they owned the company to which it was transferred. This
was self-dealing.
o It was remanded.. so if ct finds they didn’t act fairly the transaction will be
void
Rule: A member of an LLC with a material conflict of interest must deal fairly with the company
& its members
Holding: Yes & yes.

Problem 3-3: DLLCA governs – is the partnership liable for Carder using the customer’s email
addresses “unless otherwise provided in an LLC Ag. Each member and manager has the
authority to bind the LLC”
- but this is a managed member LLC with Drew as the managing partner. So it seems that she
does not have the authority to bind bc we give it do drew, but she probably has apparent
authority
- so the LLC can be bound through by an apparent agency theory through apparent
authority and be liable to a 3p even if Amanda did not have actual authority to bind the
LLC

Taghipour v. Jerez
F: The Articles of Organization designated Jerez as the manager of the LLC. The OA stated that
no loans could be made on LLC’s behalf unless authorized by resolution of all members. Jerez
obtained a loan on behalf of the LLC without other member’s consent & he failed to make the
payments.
R: If two statutes conflict, the provision more specific in application governs over the more
general provision
* here a state statute said that if a manager of an LLC executed a mortgage its valid and
binding on the company.
o Policy: 3rd party is more innocent and thought Jerez had the authority to take out
loans & members chose to elect Jerez

LLC Liability
 RULLCA § 304(a) and DLLCA § 303(a): members of an LLC are not personally liable for any
obligation of the LLC simply because they are members or managers
o Members and managers are responsible for their own acts but are not personally liable for
acts of other members
Piercing the Viel: Corporate equity doctrine that has been applied in the LLC context to circumvent
limited liability and hold members personally liable. Personal liability will be imposed when owners have
failed to treat the business entity as a separate legal entity and there is an overall element of injustice or
unfairness
(a) Alter Ego: did they treat the corporation as an extension of themselves? Did they fail to follow
the formalities we usually see in a corp?
(b) Overall element of injustice or unfairness: were they using it as an instrument of fraud? Did they
abuse the corporate forum?
No factor is dispositive
a. Whether the corporation was adequately capitalized for the corporate undertaking
b. Whether the corporation was solvent
c. Whether dividends were paid
d. Whether corporate records were kept,
e. Whether officers and directors functioned properly
f. Other corporate formalities were observed

Point is we don’t want to let ppl who are using the LLC for malfeasance get away w it
We do not need to find that the LLC was formed fraudulently to pierce the viel.

NetJets
F: Zimmerman was the sole manager of LHC, which owns NetJets. LHC didn’t pay their debt and NetJets
went out of business. NetJets sued LHC and tried to hold Zimmerman personally liable. NetJets presented
evidence that, among other things, Zimmerman took more money out of LHC’s account than he put in,
continued withdrawing money for personal uses even while refusing to pay debts LHC owed to NetJets
I: Can NetJets hold Zimmerman personally liable for the debts of LHC?
R: Whether the two entities operated as a single economic entity such that it would be inequitable for the
court to uphold a legal distinction between them
(1) whether the entities in question operated as a single economic entity
(2) whether there was an overall element of injustice or unfairness
A: (1) He often withdrew money from LHC account for personal use and transferred money into LHC
account from his persona. Many withdrawals from LHC’s account were for personal expenses, including
a residence, phone and cleaning bills, a car, and health insurance for his family. Much of the flight time
used by LHC under the lease with NetJets was used by Zimmerman and his family for personal trips. Had
sole control over all financial decisions
(2) It’d be unfair to NetJets for Zimm’s behavior to continue. The LLC was a façade for the dominant
shareholder’s money. (can use the same factors for alter ego)

Fiduciary Duties
DLLC 1101(c) OA may expand/restrict/eliminate duties except for implied contractual covenant
of good faith and fair dealing for members or managers to the extent they have those duties to the
LLC, other members/managers or another person that is member of LLC OA
DLLCA 1101(e) OA “may provide for the limitation or elimination of any and all liabilities for
breach of contract and breach of duties (including fiduciary duties)…; provided, that a [LLC
OA] may not limit or eliminate liability for any act or omission that constitutes a bad faith
violation of the implied contractual covenant of good faith and fair dealing.”
o Absent express agreement in OA to the contrary, fiduciary duties apply. 18-1104
o Can’t be unreasonable
Miller v. HCP
F: The members explicitly agreed, under the OA, to waive all fiduciary duties, to one another
and from the managers to the members. They claimed that BoD structured the sale so they would
get the most profit and fuck everyone else in the waterfall. The plaintiffs filed an action seeking
relief under the implied covenant of good faith and fair dealing inhering to an LLC operating
agreement
Issue: Does implied covenant of good faith and fair dealing imply terms in a K that address
development of contractual gaps that neither party to the K anticipated at time of contracting?

Fair= consistent with the agreement, not actually “fair”

1. General reluctance of courts to “read in” protections for minority investors based on
implied covenant of good faith that were not specifically negotiated for & expressly set
forth in the governing agreement
a. It can only be invoked when there is a gap to be filled and there was none. The
LLC agreement reflects that the parties anticipated a potential sale at the time of
contracting and formulated the conditions. It was cl

Transferability/ Admission
DLLCA 702: LLC interest is assignable in whole or in part (except as provided in the OA), but
the assignee shall have no right to participate in the management of the bizz unless all members
consent for them to become a member
- Member ceases to have power to exercise any rights or powers of a member upon
assignment of their interest
- Until assignee becomes a member, they will have no liability as a member.

DLCCA 301(b)(2): In the case of an assignee of a limited liability company interest, as provided
in § 18-704(a) of this title and at the time provided in and upon compliance with the limited
liability company agreement or, if the limited liability company agreement does not so provide,
when any such person's permitted admission is reflected in the records of the limited liability
company.
 Assignee cannot establish membership simply by pointing to “records of the LLC” There
must first be a “permitted admission” under 704
o As provided in the LLC OA; or
o Unless otherwise provided in the LLC OA, upon the aff. Vote or written consent
of all the members of the LLC
 The need for formal member action comports with the policies concerning
assignment of LLC interest & assignees possible admission
 One is generally entitled to select their bizz associates in a closely
held enterprise like an LLC

Dissolution
DLLCA 801: Curbs the ability to withdraw absent a provision for the right of withdrawal in the OA
-> so perpetual unless: (1) 2/3 of members vote for dissolution, (2) there are no other members (3)
judicial dissolution
DLLCA 802: On application by or for a member or manager or the court may decree dissolution of an
LLC whenever it is not reasonably practical to carry on the business in conformity of the OA
 + the Haley v. Talcott case gave us that extra “and no sufficient exit mechanism” juice we got from
corp law
Haley v. Talcot
F: Each owned 50%. LLC took out a mortgage to finance the purchase and both Haley and
Talcott signed personal guaranties for the entire amount of the mortgage. Falling out +
relationship deteriorated. Talcott tried to get Haley to resign from his employment at Redfin, but
Haley took the attempt as a breach of their Redfin contract. Stuck in a stalemate bc both owned
50%. LLC contained exit mechanism in the event the parties could no longer operate together.
But both wanted to keep the LLC for themselves and the exit mechanism didn’t say which party
would keep the LLC in the event of a falling out & exit mechanism wouldn’t relieve Haley of his
personal liabilities on the mortgage even if Talcott retained full control of the LLC.
Issue: May a ct dissolve an LLC when it has an exit mechanism written into an LLC agreement?
Holding: Yes. Dissolved LLC. may dissolve an LLC when it is not reasonably practical to carry
on the business in conformity with the LLC agreement and the LLC agreement does not provide
a sufficient exit mechanism. (DLLCA §18-802)

§273 pre-reqs
1. Must have two 50% stockholders
2. Must be engaged in a joint venture
3. Must be unable to agree upon whether to discontinue the bizz or dispose of assets
If the exit mech is sufficient, courts will not interfere
o Here, the agreement does not state who would regain control, it also does not relieve
Haley of his personal guarantee on the mortgage so it’d be super inequitable to leave
Talcott in control of the LLC while Haley remains personally liable

- remember to add up the winding stuff about FMV later

In re Carlisle
F: Wu Parents & Tom James formed Carlisle LLC (DE). Executed initial LLC Agreement which
they said would work on to create more detailed one. After the Company formed, WU Parent
transferred member interest to a wholly owned subsidiary, Wu Sub. James knew of transfer, did
not object, and treated WU Sub as a member from that point on. For purposes of the DLLCA, the
transfer rendered WU Sub an assignee, not member. WU Parent and James never reached
agreement new operating agreement. Disputes arose & rel. deteriorated. Both then recognized
couldn’t manage Company jointly and that one side needed to buy out the other. WU Sub filed
this action to dissolve the Company. James moved to dismiss bc WU Sub was an assignee, and
that an assignee lacked standing to petition for statutory dissolution under DLLCA §18-802.
I: Did WU Parent or WU Sub have the standing to dissolve the Company?
H: No
R:
o Lacked standing: Wu Sub + Parent lacked standing to seek statutory dissolution
of the LLC bc DLLCA 18-802 permitted only members and managers to do so.
o Not members: Neither WU Parent or Sub was a manager. WU Parent lost its
status as a member when it assigned its member interest to the subsidiary. The
transfer made the subsidiary an assignee, not a member. James did not vote or
 give written consent to admit the subsidiary as a member to have “permitted
admission” under 704(a)
o BUT other remedies: § 18-802 was not the sole extra-contractual means of
dissolving an LLC. WU Sub had standing to seek dissolution in equity because
the real relationship between it and James, the sole remaining member, was a
joint venture in which they were equal participants.
 Equity comes in when there is no reasonable method to resolve in the law

Evaluation for internal disputes

- Where/what law?
- Covered by mandatory provision?
o If yes  stop
o If no  look to K
 If K answers it then stop
 If K does not answer it, go to the default provision
 Default provision ambiguous?
o If clear  apply then stop
o Id ambiguous  analogy, interpretations, what did drafters
mean, policy

IV. Corporations
A. Incorporation
1. Draft Articles of Incorporation/Certificate of Incorporation (DE)/Charter
Required DGCL§102(a)/MBCA § 2.02(A)
 Name of the corporation – has to denote it’s a corp. or inc.
 Describe the various classes of shares, number of each, and the rights, privileges,
limitations and preferences of each (series & class)
o Cannot issue more unless the charter is amended
 Name & Address of a registered agent AND incorporator in the state of incorporation
 Purpose which can be super general like “to engage in any lawful purpose for which a
corporation may be organized” DGCL §102(a)(3)
 These are public documents for 3ps to know who to sue and shit.
Highly recommended provisions (bc its harder to amend the charter)
 Initial Directors: if not named, the incorporators must hold a meeting to elect.
However, if the power of the incorporate terminates after filing the charter, the
charter needs to name the initial director/s
 Voting provisions (like the supermaj shit)
 Management Provisions: helps insulate directors from shareholder-initiated changes/
makes it harder for outsiders to gain control
 Bylaw Provisions: any required or permitted to be in the bylaws
o Prevents the amendment of the provision without approval by both the BoD &
shareholders
  Indemnification & Exculpatory Clauses (limit liability of directors for money
damages)
Not Required: duration or initial capital

Internal Affairs Doctrine: the place of incorporation governs the relationship among the parties
in the corporation (but not if there is a k dispute between diff corps)

Post Incorporation
o Bylaws: internal document which govern the basic internal operations of the corporation
and its relations with its shareholders, officers, and directors
o DGCL§109/MBCA § 10.20: shareholders have exclusive power to amend bylaws,
unless articles permit board nonexclusive power to amend. Also need to be
consistence with Board’s power to manage the corporation. This is a check on the
board’s powers
o The existence of the corporation does not depend on the maintenance of corporate
formalities, but the benefits of limited liability may depend on the maintenance of
corporate formality
o Promoter Liability: Promoters participate in the formation of the corporation, usually in
arranging compliance and entering into Ks. promoters are personally liable on all pre-
incorporation contracts

Grant v. Mitchell
F: Grant, Mitchell, and Meltzer formed a DE LLC. Grant owned 42%, others owned 29% each.
Grant invested the money and Mitchell invested sweat equity. Grant made himself the
incorporator of Epasys in the charter. Some issues came up and he tried to name himself the sole
director and everyone else was like no we are all also directors
o One document elects Grant as Prez & Mitchell as Treasurer that was made by the atty. It
had two signature lines for each and no one signed it, but it indicates that atty thought
they were both directors.
o Another document was sent to be signed by both. By state law, this document must
identify the directors & be signed by both & they both did
o No evidence they formally met as a BoD, but they met on a regular basis to disucss bizz
H: Grant & Mitchel are the initial directors.
R: Lack of corporate formalities does not mean no BoD was formally elected after incorporation.
Once incorporator signs a document that clearly names the initial BoD, that’s it bro.
A: (1) Grant probably didn’t create a 1 person board as incorporator bc even his testimony
admits he told the other guy one of them would be on the board. (2) the signature on the doc he
don’t remember is reliable evidence that clearly listed them as both directors, it wasn’t hard to
read

B. Directors & Shareholders

1. Shareholders= see also equity financing
 Voting: Power to vote on governance matters, including the election of directors,
amendments to charter & bylaws, creation of new classes of shares, m&as and asset sales,
ratify conflict of interest transactions DGCL §211(b)
 o DGCL§212(a) each share of common stock carries one vote, but can be limited to
specified matters DGCL §151(a)
o May vote in person or by proxy DGCL §212(b)
o Majority vote wins, except in director elections when only a plurality is required
DGCL§216
 Cumulative Voting: applies only if adopted in the articles or sometimes bylaws
o Allows minority shareholders to accumulate all of their votes and allocate them among
a few or even one candidate. This increases the chances of board representation for
minority shareholders
 Supermajority Voting: require more than majority; gives minority shareholders veto
power over corporate decisions without offending corporate norms
 DGCL §242(b)(4) requires supermajority vote only when an existing
supermajority provision is to be altered or repealed. When supermajority
voting requirements appear in the charter, they can be amended or repealed by
greater vote specified in the Charter aka supermajority If its in the bylaws, it
can be amended by majority of shareholders under default.
 MBCA §7.27(b) any amendment to the Articles of Incorporation that adds a
supermajority must meet the same quorum requirements & be adopted by
same vote.
 No statutory restriction on changing supermajority in bylaws -> so they can be
amended by mere majority absent a provision indicating otherwise
Problem 5-3: Can Duncan and Stewart (now only shareholders) delete the above provision via
written consent, expand the board from 5-11 directors AND elect 6 new directors? Yes
 Since this provision was put in the bylaws, we only need simple majority to change
because they have 50% unless they state otherwise and here it doesn’t for Article 9.
Kimberlin
F:
Reasoning: The purchase agreement had a preemptive right that gave all investors the right to
purchase pro-rata share of future stock but also gave holders if 67% agreed to nullify right of
first refusal at any time. Plaintiff only owned 8% and there was no fraud. There was no fraud
because the other shareholders had no fiduciary duties and had no representation on the board.
The agreement clearly states that P’s right of first refusal could be waived by a 67% vote of the
existing shares.
Policy: Kimberlin wanted to keep his 5% in the company to be listed as a major player. The
company said he would be a major player regardless of 5% so that’s why he signed it. He wants
to be a major player because it looks good. But then he realized he wanted money and had
buyers remorse so he brought suit
 Shareholder Meetings
o Annual Meetings- for elections
 MBCA § 7.01(a): in accord with bylaws (if silent, presumably by board)
 DGCL § 211(b): in accord with charter or bylaws; if silent by board
o Special Meetings- normal bizz
 MBCA § 7.02: called by board or other person authorized by charter or bylaws;
10% shareholders (or a different percentage not in excess of 25%) may demand
  DGCL § 211(d): called by board or other person authorized by charter or bylaws
(note that no default provision for shareholder action)
 Must have timely notice with time location, and what will be covered
 For action to be valid, there must be quorum aka simple majority
 Proxy Voting: written/signed document that indicates proxy appointment
o Proxy creates an agency relationship in which the shareholder (principal) grants the
proxy power to vote.

 Preemptive Rights: rights of a shareholder to subscribe to acquire shares when a

corporation issues new shares by increasing capital stock. This protects existing
shareholders’ proportional interest (voting and ownership) in the corporation’s shares
already issued and outstanding. (also rare in public corporations so maybe move to the
closely held section)
o Not inherent, but they may be granted or denied by the articles of incorporation DGCL
§102(b)(3)

Grimes v. Alteon
I: Whether an alleged oral promise to a stockholder by the CEO to sell 10% of the corp’s future
private stock + the stockholder saying back that they are going to buy it, if there is no approval
from the board of directors and it was not memorialized in a written instrument
H: No. Board of Directors has exclusive authority to issue stock and regulate a corporation’s
capital structure.
 if Grimes’ agreement, that lacks all formalities, is allowed, it will encumber BoD
judgement or ability to run the capital structure of the corporation. When
investors are contracting to invest capital or purchase stock, statutory scheme
requires board approval and that there be written instrument that evidences those
arrangement

2. Directors= statutory power to manage the corporation DGCL §141(a)/MBCA §8.01(a)
Each public corporation must have a Board of Directors, but closely held corporations
can do away with this requirement by an agreement among the shareholders
o Inside director= individual who works with the company, but who also serves
as a director such as CEOs
o Outside director= not an employee, they do not work with the company
o Independent directors= not employees who do not have substantial ties to the
corporation
o Disinterested directors= directors without a financial interest in the relevant
transaction
 Board Size
o One director is enough MBCA §8.03(a) and the number of directors (or range) is
usually fixed by the charter or a bylaw § MBCA §8.03(c)
o Sach public corporation must have a board of directors, while closely held
corporations can do away with the board of directors by agreement among the
shareholders DGCL §§ 141(a) and 351:
o Elected by shareholders to supervise the officers
 Elections: directors elected at annual meeting of shareholders MBCA §8.03(d)
 o Plurality win means that there are more votes for him than other candidates
o Staggered boards: classes of directors are re-elected for different multi-year
terms. This is a powerful anti-takeover device because it would take someone
many years to get control of the board. Put this in the charter since it is harder
to amend. (bc the typical rule is annual ellections)
 Meetings of the Board
o Eliminated the requirement that board meetings must meet within the state of incorporation
MBCA §8.20(a); DGCL §141(g):
o permit directors to be considered "present" at a meeting (even if not physically present) if the
director participates in the meeting by telephone or other similar communications device that
allows the directors to hear each other MBCA §8.20(b); DGCL §141(i):
o MBCA §8.21; DGCL §141(f): permit directors to act without holding meeting
o Written consent if all the directors consent the action, as long as charter or bylaws
do not provide otherwise
 Common in close corporations
o Directors may act in any meeting held regularly or a special meeting. MBCA § 8.22
o Directors may waive notice of a meeting, either in writing or simply by participating in the
meeting MBCA § 8.23
o Model Act §8.24(a) and (b); DGCL §141(b): majority of directors satisfies statutory
requirements; but the charter can specify more or less than a majority
o Model Act §8.24(c); DGCL §141(b): majority vote is required to act unless otherwise
prescribed in the charter

 Board Committees
A Board may act through committees composed of one or more directors
o Committees cannot act on items that require shareholder vote, nor may a committee
adopt, amend, or repeal bylaws of the corporation. DGCL § 141(c)(2)
o Cannot fill vacancies on the board or authorize or deauthorize dividends, except
pursuant to formulas the whole board has adopted. MBCA §8.25(e)
o Committees cannot act on items that require shareholder vote, nor may a committee adopt,
amend, or repeal bylaws of the corporation DGCL §141(c)(2)
 Removal of Directors
Generally, directors may be removed from the board by shareholders, with or without cause,
unless the Charter provides that only for cause
o Can be removed with judicial proceeding for fraudulent, dishonest conduct, or
gross abuse of authority MBCA §8.09
o If you have a staggered board, then only for cause unless charter provides
otherwise DCGL §141(k).
How do you amend the charter?
1. Board of Directors adopt a resolution saying they want to change the Charter
2. Board then needs to care a shareholder meeting for them to approve it. All the proper
meeting calling rules need to be followed
3. Shareholders approve
4. The company then files the amended certification of incorporation with the Secretary of
State

C. Financial Rights in Corporations

 5. Equity Financing = gives shareholders (1) power to control & (2) right to profit
Creation of Equity Securities= authorized when the articles permit the BoD to issue them. Art
must say the total # of shares, class, what rights, preferences & limitations
 Capital stock is all of the equity interest a Corp. has
 Shares are issued when they are sold to shareholders; and they are outstanding when
held by shareholders
o If a Corp. buys them back, they are treasury shares & the BoD can decide for
what to sell them again
 If all equity holders have the same rights, there is only one class of equity holders. If
you want to make distinctions within a class, you create a series.
o Common shares: (1) unlimited voting rights (2) the right to the residual assets of
the corp pro rata (after payment of all corp liability). Corps must have at least one
share having both of those rights at one time
o Preferred shares: have some preference on priority in payment over common
shares. Some give voting rights to elect majority of the boardTerms are set out in
articles.
 Dividends are pro rata payments to shareholders based on corporate earnings usually
in the form of cash, main source of revenue for shareholders
o Solvency test: prohibit distribution that would result in insolvency
o Balance sheet test: measured by
o Par value: value of stock as stated in charter. It has very little relation to the
shares’ market price. States can require companies set a par value below which
shares cannot be sold. But its not used anymore?
Klang
R: Directors have reasonable latitude to depart from balance sheet to calculate surplus
so as long as they evaluate assets & liabilities in good faith on the basis of acceptable
data
o DGCL §160 forbids a corporation from repurchasing their shares if doing so
would cause an impairment of capital (amount spent on repurchase exceeds
surplus). Surplus= net assets exceed the par value of all outstanding shares of
stock
Upside to equity: no required re-payment If you sell shares. If company goes under, you aren’t
on the hook for all the money
Downside: owner must surrender part of their ownership stake to get shareholders & uncertain
future value

Alderstein
F: On July 9th, Alderstein founder of Corp, called a board meeting to discuss an arbitration issue.
Then directors presented him with the proposal for Reich to take control, which he rejected.
Board majority voted to issue Reich supervoting preferred stock, giving Reich majority. Then,
Board voted to remove Alderstein for cause as CEO and strip him of Chairman title
I: Was this a proper meeting of BoD? If so, will the decision to keep Alderstein uninformed
about the Reich proposal prior to the meeting invalidate the board approval?
H: The meeting was called properly, but the action taken must be invalidated.
Piercing the Veil
Will happen most likely in a tort cause because tort victims don’t get a chance up to negotiate
with shareholders about who should be liable. K creditors did have a chance to negotiate the
amount & risk upfront
1. Check first for direct liability: people will always be liable for their own torts.
Some Ks will insist on personal guarantees from shareholders. But absent this,
the injured party will have to get past corp. veil to recover
2. Corporate Formalities & Alter Ego
3. Showing of Inequity/Unfairness
a. courts almost always pierce when there is a material misrepresentation and
rarely pierce without one
b. the corporation doesn’t need to be fraudulently created, just engaging in
fraudulent acts
c. Nicole says here we require direct proof of a shame or fraud or crime unlike
LLc.
d. Best case for π is to suggest unjust enrichment

Soerries – piercing to reach individual shareholders

Commingling of assets, lack of corporate formalities, undercapitalization, dominated and control
by one shareholder
Generally, fraud wrong dishonesty or injustice
Blair – piercing corporate context
Doe v. Exxon – agency theory for parent liability bc alter ego never rlly fits

Closely Held Corporations= a corporation without a ready market for its shares
o Shareholders cannot easily sell their shares so there is no easy exit strategy
o Shareholders receive a salary from the corporation bc they are also often
employees
o
A. Shareholder Agreements
Setting up a shareholder’s agreement to allocate control is (1) simple and (2) a way to protect
minority shareholders because majority has complete control
(1) Vote Pooling Agreement: obligates shareholders to vote in a specified manner;
expressly allowed DGCL§218(c)
 Under straight voting, the candidates who obtain plurality win. Under
cumulative voting, the votes necessary to elect one or more directors is fixed by
formula.
 Some words: Incorporating and receiving shares proportionate to capital
contributions would be a grave mistake for shareholders who barely contributed
as they would become minority shareholders.
o The majority shareholder would elect all the directors under straight
voting & these are the directors who make all the management
decisions. It would affect the minority shareholders as they would be
powerless

(2) Shareholder Agreement: allocate to shareholders control over specified

decisions usually made by directors because typically that is not allowed MBCA
7.32
o Minorities can bargain for rights to specified corporate transactions
o Elimination of the board of directors allowed to have direct management by
stockholders DGCL§351
o Delaware allows these things if they are a statutory closed corp & have the
explicit opt-in in the charter.
o Any limits on BoD Authority permissible if in the charter

How to go about these analyses in which they want to change rules

1. What is the default rule?
2. Why might some companies want to change this default rule?
a. Is it in the bylaws? Charters? Private agreement?
3. How can companies change this default rule?
4. Any cautionary tales from the cases?

Salamone v. Gorman
I: May a shareholder agreement modify default rule that a majority of relevant shares can elect a
Board Members? YES
 In Delaware, you need to follow a set of rules to set up a shareholder agreement for
closely held corporations that can limit board authority.
Rule: A voting agreement, if it is to be given the effect that deprives a majority of shareholders of power
to elect directors at an annual meeting or through written consent must quite clearly intend to have it. A
court ought not to resolve doubts in favor of disenfranchisement. In order to overcome the default rule
and establish a per-capita voting scheme, the party must demonstrate that intent by clear and convincing
evidence
Reasoning: The Voting Agreement did not violate the Delaware General Corporation Law, Del. Code
Ann. tit. 8, § 212(a), because the Agreement provided for a per capita scheme for the designation of two
nominees, who were then elected by a vote of the stockholders consistent with the "one share/one vote"
default rule and the Certificate of Incorporation
Problem 5-1: If there is no shareholder agreement, we can remove with or without cause unless
charter says it has to be for cause (default rule). We can include such a restriction, but we need
to make sure that the putative shareholder sees the restriction before they become a shareholder.
 So this restriction is enforceable. If we go 33/33/33 no one has more power than the
other.
 If Luke is removed, can Duncan (40%) be entitled to fill the resulting vacancy over
Stewart’s objections? Yes
o Directors can fill vacancies with majority vote.
o Just because Luke loses his seat, doesn’t mean he loses his shares. Can use
shareholder power to appoint
 If we kick out one of these directors and require unanimity moving forward, theres
probably going to be deadlock.

B. Transfer Restrictions
Transfer restrictions are widely used to control selection of business associates, to provide
certainty in estate planning, and to ensure that the corporation complies with close corporation
statutes + protect fam bizz
 May appear in charter, bylaw, or separate agreement DGCL §202(b)
 Requirements: (1) must be noted conspicuously on stock certificates (2) must be
“reasonable” (for a proper purpose)
 General Reasonableness Test DGCL §202(c)
o (1) the shareholder must offer the corporation or other shareholders the option to
purchase the shares, either at a price specified by prior agreement or at the price offered
by the prospective third-party purchaser
o (2) the corporation or other shareholders are obligated to purchase the shares (a "buy-
sell" agreement)
o (3) the corporation or other shareholders must approve the transfer of the shares ((a "prior
approval" or "consent" requirement)
o (4) the shareholder is simply prohibited from transferring to certain persons or classes of
persons
 Flat prohibitions on transfer are viewed very skeptically by courts and usually would be struck
down as unreasonable
 Types of Transfer Restrictions
o Options (right of first refusal, right of first offer)
o Buybacks= gives minority exit so they don’t get stuck
o Consent= you can sell if remaining investors say it’s okay
o Forced sale provision= gives remaining shareholders right to regain control
 Most common: buy-sell agreements
o Solve many problems in close corporations
 (1) they provide liquidity for shareholders who wish to withdraw
 (2) they determine the price of the shares at a time when none of the parties to the
agreement knows which of them will be the sellers and which will be the
purchasers
 Thus providing an incentive to all to provide for a "fair" price
 (3) they allow the principals of the corporation to plan with some certainty
 o Prices in a buy-sell agreement take one of four forms
 (1) fixed price: must be updated constantly to reflect the current value of the
shares
 (2) book value, the most popular measure because of ease of determination, but it
is based on historical costs and may not reflect true underlying values
 (3) appraisal, which has the potential to be very good, but the parties should
decide beforehand on what basis the business should be appraised
 (4) formula, which suffers from being very complicated
Henry v. Phixios
F: Henry was fired bc they alledge he was competing with the Co. & this was okay under the
stock transfer restriction. But restrictions were not noted in the stock certificate, so he claims he
was not aware before he bought the stock. Under DGCL §202(a), actual knowledge is required
before.
1. Was the transfer restriction conspicuously noted?
No
2. Was he informed/had actual knowledge before he
joined on? No- then fails under 202(a)
3. Did he affirmatively assent to be bound either
through a vote or through shareholder agreement? No- then fails under 202(b)

Even though he had actual knowledge after signing on; this does not count unless P
affirmatively assented
o No evidence that P was on notice that he was modifying his legal rights when he
acknowledged receipt of the August 10, 2015 email

Problem 5-2
1. No stock of the corp shall be transferred unless approved by Directors thereof
a. Retain control by the remaining shareholders: consent provision
2. If offered for sale, Corp has right of first dibs at no more than book value
a. Providing mechanism for sale gives us certainty and results in less disputes bc it is clear
3. If Corp isn’t interested and can’t afford it, stockholders will be given the chance
4. If they can’t, could be sold to blood members of family
a. Might not be reasonable in this scenario bc uncle is my marriage and it exceeds the goal
of keeping it in the fam

C. Voting Trusts= legal title of share transferred to trustee

Unlike proxies in which the shareholder retains ownership of the shares.
 Must be in writing & filed with the corporation DGCL §218
D. Deadlock
Shawe v. Elting
F: Shawe is withholding his vote making it nearly impossible for the company to do anything

E. Oppression of Minorities
DIRECTORS FIDUCIARY DUTIES

Gagliardi
Facts: π brings a derivative claim on behalf of the corporation because he claims that board made
some questional business decisions since they outsted him as Chairman of the Board.
 If there is no conflict of interest, the director is not responsible for decisions made
in good faith. We need to incentivize directors to take informed risks and we do
not want to penalize them for taking a risk, even if it turns out badly
Issue: Is an independent and disinterested corporate director liable for a corporate loss if the
director acted in good faith?
Holding: No
 The standard of liability is gross negligence as to whether a business judgement reached
by a BoD was an informed one
What do courts look at to assess if it has been violated? The process of reaching
the decision based on the information that was reasonably available π cannot
state a claim for relief no matter how foolish the decision may appear if it was
done through and informed process and in good faith.
As in Gagliardi, the plaintiff here only believes that there were poor business
transactions made by the board without explaining why the facts demonstrate they
were uninformed or grossly negligence. To permit the possibility of director
liability on that basis would be very destructive of shareholder welfare in the
long-term.
Unlike Gagliardi, the plaintiff here has pointed to facts that demonstrate that the
board failed to gather the requisite information to make this business decision,
rather than just expressing dissatisfaction with the board’s decisions.

Van Gorkom
Van Gorkom Elements: Directors breached their duty of care by their failure to inform
themselves of all information reasonably available to them and relevant to their decision to
recommend the merger and by their failure to disclose all material information such as a
reasonably stockholder would consider important in deciding whether to approve.
 Directors failed to inquire into Van Gorkom’s role in forcing the “sale” of the Company and
in establishing the per share purchase price and were uninformed as to the intrinsic value of
the company
o Two-hour meeting without prior notice & there being no emergency
o Did not inquire into the fairness of the $55 price & value of company. Van Gorkom
had not read merger documents and he suggested the $55
o CFO did not evaluate offer
o No investment bank advisory opinion
o Directors were not given documentation to support adequacy
o Failed to review merger docs- No written document with terms of the merger
So we need to disclose all material facts (objective standard)
- look for length of meeting, negotiation, amount of work put in before giving board materials,
how came up with price, was it time pressure
Board members can rely on DGCL 141(e) and be protected by relying in good faith upon records
reports or statements. But in Van Gorkom no investigation was done so can’t rely on what was
said

Caremark - inattention oversight derivate claim

Necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement
any reporting or information system or controls OR (b) having implemented such a system or controls,
consciously failed to monitor or oversee its operations thus disabling themselves from being informed of
risks or problems requiring their attention

Disney (2006)
F: The Walt Disney Company (Disney) hired Michael Ovitz b/c friends with CEO and chair of
board as its president. Ovitz was founder of a talent agency (CAA) where he made 20mil a year
so he contracted for generous payment w/ Disney. The board of director’s compensation
committee approved an employment agreement with Ovitz, which contained a non-fault
termination provision providing that if Ovitz left his employment with Disney through no fault of
his own, he was entitled to generous payments under a non-fault termination (NFT).
 If NFT, receive $1 million per year and the annual bonus payment of $7.5 million for the
rest of the K term
 $10M termination fee, and acceleration of his options for 3 million shares
 He was terminated after 14 months and received $130 million.
Issue: Is bad faith properly defined as an intentional dereliction of duty and conscious disregard
for one’s responsibilities?
Holding: Yes. And bad faith is not gross negligence. So all their arguments fail.
Three possibilities for bad faith
 Subjective bad faith – “actual intent to do harm”
o “That such conduct constitutes classic, quintessential bad faith is a proposition so well
accepted in the liturgy of fiduciary law that it borders on axiomatic.”
 Lack of due care – what Ps in Disney argued as gross negligence
o “However, gross negligence, including the failure to inform of reasonably available
material facts, cannot by itself constitute bad faith, since both the Delaware statutes and
the common law distinguish between conduct that is grossly negligent and conduct that is
not in good faith.

 Intentional dereliction of duties – a conscious disregard for one's responsibilities” -actually

claimed
o “Fiduciary conduct of this kind, which does not involve disloyalty (as traditionally
defined) but is qualitatively more culpable than gross negligence, should be proscribed.”
o Section 102(b)(7) “distinguishes between ‘intentional misconduct’ and a ‘knowing
violation of law’ (both examples of subjective bad faith) on the one hand, and ‘acts ... not
in good faith,’ on the other. Because the statute exculpates directors only for conduct
amounting to gross negligence, the statutory denial of exculpation for “acts ... not in good
faith” must encompass the intermediate category of misconduct captured by the
Chancellor's definition of bad faith.
Π Arguments
 Breached their fiduciary duties to act with due care and in good faith by
o (1) approving the OEA, and specifically, its NFT provisions as lack of due care;
 Found OEA, directors were adequately informed so its not
 o (2) approving the NFT severance payment to Ovitz upon his termination—a payment that
is also claimed to constitute corporate waste
 Core argument: breaches of fiduciary duty deprive D of protection of the business judgment rule
and D has burden of proof
 The shareholders’ final claim is that, even if the committee’s approval of the agreement is
protected under the business judgment rule, the payment of severance to Ovitz constituted waste.
A plaintiff is not entitled to a remedy if he fails to rebut the business judgment rule, unless the
transaction constitutes waste. However, a claim of corporate waste requires proof that the
exchange was so one sided that no business person of ordinary, sound judgment could conclude
that the corporation has received adequate consideration. + agreement provisions have rational
business purposes

While there are best practices and none of them are implemented, it is not enough to overcome the BJ
rule. It’s not failure to implement best practices, it is a systematic utter failure to exercise oversight before
they can be subject to liability.

The law presumes that in making a business decision the directors of a corporation acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interest of the company. If
that is shown, the burden shifts to the director defendants to demonstrate that the challenged act or
transaction was entirely fair to the corporation and its shareholders

Stone v. Ritter
F: AmSouth failed to report suspicious account activity and did not comply with federal anti-money
laundering requirements; “Classic Caremark claim”

Disney: failure to act in good faith requires conduct that is qualitatively different from, and more culpable
than, the conduct giving rise to a violation of the fiduciary duty of care (gross neg)
 Fiduciary intentionally acts with a purpose other than that of advancing the best interest
of the corporation
 Fiduciary acts with the intent to violate applicable positive law
 Intentionally fails to act in the face of a known duty to act, demonstrating a conscious
disregard for his duties – apparently in Caremark we held this was necessary to establish
liability for director oversight

The fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary
conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith.

Where directors fail to act in the fact of a known duty to act, thereby demonstrating a conscious disregard
for their responsibilities, they breach the duty of loyalty by failing to discharge that fiduciary obligation in
good faith.

Analysis
They did have a reasonable reporting system set up to alert them of things is just employee fuck up

Conflicts of Interest !!
 Conflicts are endemic
o To prohibit all conflict-of-interest transactions in this context might sharply limit the pool
of people who would be willing to serve as directors of America’s public companies
What is a conflict-of-interest transaction? Any transaction in which a controlling shareholder, director, or
officer of the corporation has a material financial or personal interest that does not align with the
corporation’s interest.

DGCL § 144 provide that conflict-of-interest transactions are not invalid IF: (most courts require 1 or 2 +
3
(1) Process: The material facts as to the director's or officer's relationship or interest and as to
the contract or transaction are disclosed or are known to the board of directors or the
committee, and the board or committee in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or
(2) Process: The material facts as to the director's or officer's relationship or interest and as
to the contract or transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith by vote of the
shareholders; or
(3) Substance: The contract or transaction is fair as to the corporation as of the time it is
authorized, approved or ratified, by the board of directors, a committee or the shareholders.

Valeant Pharmaceuticals – Director Self-Dealing

F: CEO & other Board members were sued in a derivative action due to some large cash bonuses paid out
to executives bc the process pursued by director’s was not arm’s length, was self-interested & unfair to
company.
- When we evaluate a conflict-of-interest claim, we look for procedural fairness and substantive
fairness. COI claims cannot be voided if there is procedural and substantive fairness.

2 Different Ways to Cleanse a Transaction under DCGL §144 (procedural fairness)

(2) Disclose material facts to board or committee AND the majority of the disinterested directors
approve the transaction
 Did disinterested directors approve the transaction? Not in this case bc no one was considered a
disinterested party.
(3) Shareholder Ratification: disclosed material facts to shareholders entitled to vote and the approve
it
 Did majority of disinterested shareholders, in an informed vote, ratify the transaction? No
because the directors were not fully informed. A lot of the metrics the decision was based off of
was found to be inaccurate.
(4) Was the transaction fair? What does the officer being sued need to show in order to prevail? Entire
fairnessssss
4. We have to look at the process here because they are not really super independent! Was the
process that the board followed to implement this transaction fair? ‘
 The transaction was initiated by Panic who stood to receive $5M
 Was structured so that everyone involved making decisions would receive a bonus
 The people in the compensation committee were beholden to Panic
 Structure was not negotiated
 Started out with an amount for bonuses & then tried to justify it
How to Make it Fair
 Make the compensation committee be made up of disinterested OR independent
members
 5. Was the substance of the transaction fair? This is Fair Price lol
 Was the bonus justified? No. Should’ve been calculated with reference to the value
added to ICN. Not made w proper info
 The bonus was like double dipping bc they had already been paid a bonus for this
product before it’s a spin-off
 They couldn’t justify the price with FMV + unfair process to reach that price its
gonna be a very high burden to overcome

Self-Dealing
Directors who stand on both sides of a transaction have “the burden of establishing its entire
fairness, sufficient to pass the test of careful scrutiny by the courts.” Entire fairness can be
proved only where directors demonstrate fair dealing and fair price. Fair dealing addresses the
questions of when the transaction was timed, how it was initiated, structured, negotiated,
disclosed to the directors, and how the approvals of directors and the stockholders were obtained.
Fair price assures the transaction was substantively fair by examining “the economic and
financial considerations.”

Obv as π we want to bring DOL bc we get no BJR & ∆ has to show entire fairness.

Shareholder Ratification
We need this to do that DCGL § 144 (2). We need material facts as to the directors relationship
or interest to be disclosed duh ;) “required disclosure” to mean a disclosure of (i) the existence
and nature of the director’s conflicting-interest, along with (ii) all facts known to the director,
respecting the subject matter of the transaction, which a director free of the conflicting-interest
would reasonably believe to be material in deciding whether to proceed with the transaction

Challenged to action can still be made if BJR presumption can be overcome

Gantler v. Stephens pg 477 – this is a direct case somehow

F: Appellant shareholders filed a complaint alleging that the appellees, officers and directors,
violated their fiduciary duties by rejecting a valuable opportunity to sell the company, deciding
instead to reclassify the company's shares in order to benefit themselves, and by disseminating a
materially misleading proxy statement to induce shareholder approval. The Court of Chancery
dismissed their complaint and the shareholders appealed the case.
 This was the only option that guaranteed that the BoD retained their jobs so they have
a financial interest in the outcome of the transaction, which means there is a conflict
of interest
I: So we are looking at whether there was appropriate shareholder ratification aka a vote by a
majority of independent fully informed shareholders? NOOO
- So we look at this voting process. What was the vote on? A ratification needs to stand
on its own ! There can’t be a dual purpose like ratifying bylaws + approve COI.
- its not enough just that they vote and ratify it either, they have to be FULLY
INFORMED.
o The proxy materials sent to the shareholders did not have all the
information. They just said privatization is the best route but didn’t really
explain why + the reason they lost the selling bids is because they didn’t
do proper due diligence and refused to hand over information
 o Also spent like 15 minutes considering whether to sell the company

Zuckerburg
F: A stockholder of Facebook, Inc., Ernesto Espinoza, challenged the decision of Facebook's board of
directors in 2013 to approve compensation for its outside, non-management directors. This comprised six
of the eight directors on Facebook's board at the time. Espinoza asserted claims against the defendant
directors, Zuckerberg et al., for breach of their fiduciary
I: Can a disinterested controlling stockholder ratify a transaction approved by interested board of
directors without adhering to corporate formalities for taking stockholder action and thereby shifting the
standard of review from entire fairness to BJ? NO
o It is therefore of no moment that Zuckerberg undisputedly controls Facebook. Although he can
outvote all other stockholders and thus has the power to effect any stockholder action he chooses,
he still must adhere to corporate formalities (and his fiduciary obligations) when doing so,
because his rights as a stockholder are no greater than the rights of any other stockholder—he
simply holds more voting power.
o Under Delaware law, stockholders can assent to a corporate decision by formal vote or written
consent. Requires prompt notice of such consent to nonconsenting stockholders
H: Motion for summary judgement is denied and the entire fairness standard applies

Corporate Opportunities
 In addition to oversight and instances of self-dealing, courts have identified other contexts in
which the duty of loyalty is relevant
o One of these is the diversion of corporate opportunities for the benefit of a corporate
director or officer
o These cases involve competition between the corporation and the director or officer
 As an initial matter, the plaintiff claiming redress under the ‘‘corporate opportunity’’ doctrine
must prove that the opportunity was a corporate opportunity
o Courts have identified three tests of corporate opportunity:
 (1) The ‘‘interest or expectancy’’ test, which precludes acquisition by corporate
officers of the property of a business opportunity in which the corporation has a
‘‘beachhead’’ in the sense of a legal or equitable interest or expectancy growing
out of a pre-existing right or relationship;
 (2) the ‘‘line of business’’ test, which characterizes an opportunity as corporate
whenever a managing officer becomes involved in an activity intimately or
closely associated with the existing or prospective activities of the corporation;
and
 (3) the ‘‘fairness’’ test, which determines the existence of a corporate opportunity
by applying ethical standards of what is fair and equitable under the
circumstances
How did the director learn about the opportunity? Was the company in a financial place to go for the
opportunity?
 Duty of Loyalty and Corporate Opportunities
o Directors and officers breach the duty of loyalty when they divert corporate opportunities
to themselves or their benefit and are competing with the corporation unless
 Offer to corp first or ask for consent after disclosure
 Waived: DGCL 122
 Waived MBCA 2.02 (narrower, requires advance consent)

Dweck
RS: The doctrine ‘‘holds that a corporate officer or director may not take a business opportunity
for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the
opportunity is within the corporation’s line of business; (3) the corporation has an interest or
expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate
fiduciary will thereby be placed in a position inimical to his duties to the corporation.’

Litigation to Enforce Duties

Requirements for derivative suits
o (1) plaintiffs must have been shareholders at the time of the alleged breach of duty
(‘‘contemporaneous ownership’’ rule);
o (2) plaintiffs must remain shareholders throughout the litigation (‘‘standing
requirement’’);
o (3) shareholders must ‘‘demand’’ that the board of directors take action before the
shareholder assumes control of the litigation (‘‘demand requirement’’); and
o (4) once a derivative claim is filed, the court must approve any settlement.

1. Demand Futility
a. In Delaware, the Court must decide whether
i. (1) The directors are disinterested and independent; and
ii. (2) The challenged transaction was otherwise the product of a valid
exercise of business judgment.
Therefore, demand will not be excused unless π can show a reasonable doubt about
whether the board was either (1) disinterested or independent OR (2) entitled to
protections of BJR

Prong (1) Beam Whether a reasonable doubt exists as to the disinterestedness or independence of
a majority of the board in responding to a demand. Aka could the board have acted
independently?
o Lack of independence: Director is so “beholden” to an interested director that his
or her “discretion would be sterilized.”
o Evaluation of personal friendship and independence: “To render a director unable
to consider demand, a relationship must be of a bias-producing nature”
 “Allegations of mere personal friendship or a mere outside business
relationship, standing alone, are insufficient to raise a reasonable doubt
about a director's independence”
In evaluating whether a director is independent for the purposes of determining whether demand
is excused, one of the key questions is whether that individual is dominated and controlled by an
interested director. If they are more willing to risk their reputation, then

Prong (2) π has to plead particularized facts creating a reasonable doubt that a majority of the
board:
(a) Was adequately informed when making the challenged decision, or
(b) Honestly, and in good faith, believed that the challenged decision was in the best
interests of the corporation?